Option Investor

Daily Newsletter, Saturday, 09/10/2005

Printer friendly version

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Energy Stocks Power S&P to Five Week High

In a continuation of the Labor Day rally the energy stocks bucked the trend and rallied strongly to push the S&P within three points of a new four-year high. I say bucked the trend because those gains were in the face of falling oil prices. Crude prices fell to close at just over $64 and well under the pre-Katrina levels. The gains came after the Dept of Energy released a report saying winter energy costs were going to be 24% higher than in 2004. The DOE said total energy costs would soar to $1.08 trillion for an increase to consumers of $209 billion. The report provided lift not only to oil stocks but coal, gas and even uranium issues. Also helping to push the indexes higher was a surge in homebuilders and materials stocks as the cost estimates for Katrina continue to grow.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Weekly

Friday was devoid of any material economic reports but there was plenty to move the market. The only economic report for the day showed Import Prices rose +1.3% in August and inline with expectations. Excluding energy prices remained flat. Export prices fell again for the third month out of the last four. The main driver for the headline import price increase was a jump of +7.1% in oil prices. This brought the rise for the year to 42.5% for oil prices and +7.6% for import prices overall. This data was all gathered before Katrina struck. Import prices should show another sharp jump over the next few months as the demand for building materials increases prices from around the globe.


Before You Make Another Trade...

...Check in with proven traders like David Fried (Buyback Letter), Bill Martin (FindProfit) and Dick Davis (Dick Davis Digest).Plus, download your free copy of "10 STOCKS SET TO SOAR", your exclusive chance to get ten stock picks from 10 leading experts in their respective fields.

Click here to get your copy of this special report:

The main focus for the day was the cost of rebuilding in the aftermath of Katrina. New estimates are now saying the cleanup could take as long as two years and rebuilding as long as five years. FEMA is saying the sludge being left behind as water is pumped out contains a combination of toxic materials and dangerous bacteriological material. The bacteria comes from carcasses of dead animals onshore as well as fish washed ashore and dying in the stagnant water. There is also bacteria from flooded sewage systems and treatment plants. The toxic materials come from flooded chemical plants and waste storage companies. FEMA says homes flooded with this toxic cocktail are no longer fit for human habitation. They fear an outbreak of disease and are forcibly evacuating all remaining residents of the affected areas. Entire neighborhoods could be bulldozed including the top foot of topsoil to remove the toxic sludge.

Damage estimates have risen well over $100 billion and could reach $200 billion or more before it is over. Insured losses are now estimated at between $40 and $60 billion but much of the individual losses are uninsured. We will be hearing about Katrina cleanup for years to come with untold billions of dollars spent for rebuilding.

That spending is still not expected to add to the GDP in 2005. The official estimates are still for a reduction in Q3 GDP of -0.5% and Q4 GDP of -1.0%. Because the massive rebuilding effort is likely to gain traction by Q1-2006 the estimates are for an addition of +1.0% to GDP for all of 2006 and beyond. This will go down as the worst national disaster in U.S. history and that means the recovery effort will rival the Job Corp projects of the early 1900s. Companies in the building sector that have any presence in the south are soaring with regional companies seeing the biggest jump. Materials companies from around the globe are also seeing strong gains in stock prices from anticipated material demand. Waste companies, Waste Management (WMI) and Allied Waste (AW) stand to make windfall profits as the majority of demolished material makes its way to their landfills. Cleaning up the toxic problems will go to companies like Clean Harbors (CLHB) who clean up contamination problems. Actually the water being pumped back into the lake is very polluted and will cause serious problems for the lake. Groundwater has been contaminated and the more toxic water pumped into the lake the worse the future problems will be.

The gains in materials, construction and energy stocks sent the S&P soaring to a high of 1243 and only -3 points from a new four-year high. This is a major departure from historical norms but it was only the first week of September. It is entirely possible that the magnitude of expectations for the rebuilding process will overcome any historical Q3 decline. I am watching the process with a skeptical viewpoint while enjoying the gains in my energy stocks.

Compx Chart - Weekly

SOX Chart - Weekly

Some of the gains on Friday came from the chip sector after updates from three major companies. Intel affirmed their forecast for the quarter on the strength of notebook demand. Still INTC fell to $25.20 from $26.10 after the release. Their outlook was positive but the expectations had already been priced in over the prior three days. Those hopes were removed very quickly. Texas Instruments also released their Q3 update and TXN raised their earnings estimates from 31-31 cents to 36-38 cents. TXN also finished in the red but only by a penny. National Semi (NSM) announced earnings that fell -27% but beat the street. They also raised their outlook saying that their business was stronger than expected for the quarter. NSM also closed down for the day. The combination of the three chip updates and the positive outlook sent the SOX higher by +3.35 to 482 and very close to a new 52-week high at 486. This broke the SOX out of recent range from 465-475 and under normal circumstances would suggest a breakout ahead. Despite the chip gains the Nasdaq was only able to post a +9 point day. This is very anemic given the gains in the other indexes.

Not all companies are benefiting from the potential rebuilding effort. Yellow Roadway warned that Katrina would lower their earnings for the current quarter. An area the size of Great Britain has been taken out of their shipping universe for potentially an entire quarter. YELL fell -3.20 to a new 52-week low. Also near a new low is FDX at $79.80. Both of these companies should experience a dramatic jump in shipments into the hurricane area once the rebuilding effort begins.

Airlines are moving lower every day as they struggle to work around the airline blackhole in Louisiana and the loss of huge numbers of business and tourist travelers into the area. Also impacting them is the high cost of jet fuel and the low availability. Jet fuel cost $1.00 a gallon in Q1 and a level that was already causing problems. It had risen to $1.73 in early Q3 and airlines expect to pay an average of more than $1.89 before the quarter is over. The rising price of fuel is squeezing the life out of the carriers. Continental said today that it will spend $2.6 billion for fuel in 2005 compared to only $1.6 B in 2004. How do you deal with a $1 billion increase in fuel costs in just one year? CAL said fuel would account for 24% to 26% of total costs in Q3 compared to only 14.7% in Q1. Delta said on Friday that every penny of fuel increase will cost them $25 million a year. When we see the price of oil up 50-75 cents a day we don't realize that this is hundreds of millions of dollars of impact to airlines and to transportation of all kinds. This is why the transports closed at a two month low on a day when the other major indexes are near 52-week highs.

Oil prices completed their fifth day of declines in anticipation of foreign supplies hitting our shores any day now. However, there have been some holdups in the 2 mbpd promised from the 20+ nations in the EIA. There is an extreme shortage of tankers to carry the product and organizing which tanker filled with what type of product goes to what port/refiner is also a challenge with four of our major refiners still offline. 5% of our daily refining capacity is still offline and will likely be offline for months to come. Four refineries, each individually owned by Exxon, Conoco, Murphy and Chevron accounting for 901,000 bbls per day have sustained severe damage and it is possible two of them may not be back online until December or even later. These refineries happen to be the "smart" refineries that can refine different types of crude including the sour Saudi crude. This means light sweet crude will be in higher demand than ever in an effort to refine gasoline and jet fuel. Jet fuel continues to be in short supply with numerous airports running at low levels. Airlines report having to top off tanks at airports with fuel and fly with more fuel than normal to those airports on short supply. This assures the planes will have enough fuel to return if a shortage occurs. Flying with full fuel loads burns more fuel because of the increased weight but it is better than having to wait for the next fuel delivery before being able to take off again. Continental said there was currently a daily shortfall of -100K to -150K gallons of fuel and that will grow as the fall flight schedule increases.

Some of the oil coming from overseas will come in the form of gasoline and jet fuel instead of crude oil. This is good considering the shortage of refining capacity but bad for users since this fuel will have a higher cost than that refined here in the U.S. Some refiners in Europe have higher costs resulting in higher sales prices plus there is the added shipping expense to the U.S. Most Americans don't realize that gasoline has been selling for over $6 a gallon in Europe for some time. Most people also don't realize that before the hurricane 10% of our gasoline was imported, mostly from Mexico and South America. Everybody in the U.S. is whining about $3 gas but the outlook is clear, prices are going higher. As the world's largest consumer we have been sheltered from the prices others have been paying but our time is running out.

The Minerals Management Services report for Friday showed that shut in oil from the Gulf had risen from 58% to 60% of capacity instead of falling as better data became available. This has been dropping much slower than expected and more damage is being discovered every day. It is not likely to completely recover in 2005. Shut in gas has recovered to only 38% but that is still amounts to over 4 billion cubic feet per day. This is putting a huge crimp in the electric generation sector. Coal demand is soaring with companies like Peabody Energy (BTU), Fording Coal (FDG) and Console Energy (CNX) hitting new all time highs.

The IEA also released a report on Friday saying that 90% of Gulf production would be back online within 3-6 months. They estimate a loss of 55 million bbls of production through December. They said there was substantial pipeline damage with 37 platforms in shallow water completely destroyed and four in deep water. Shell's deep water platform, Mars, had suffered extensive damage. Shell estimates six months to repair it. The Diamond Offshore rig, Ocean Warwick, is expected to take a year to repair after breaking free and running aground 66 miles away. The IEA said 20% of offshore platforms and 12% of rigs remain evacuated two weeks after the storm. Because of the hurricane and some slowdown in other areas of the globe the IEA lowered its demand growth by -240,000 bbls for 2005 to 1.35 mbpd. Demand growth for 2006 was still expected to be in excess of 1.77 mbpd. The committee will meet on Sept 15th to assess the hurricane impact and the result of their 60 million bbl release into the system.

On Friday oil prices fell in anticipation of foreign oil hitting our shores. However, energy stocks rose in anticipation of higher prices ahead as fall demand exceeds our current production capability. The pause we saw this week was simply profit taking from the Katrina bounce and uncertainty of how fast production would come back on line and how fast European oil would hit our shores. Now that the smoke is clearing the picture is still the same and buyers are coming back to energy.

The bounce in energy, materials and builders sent the indexes to four-week highs but not over strong resistance at those levels. There is also a quarterly S&P rebalancing in progress where funds increase their holdings of stocks, which have risen significantly and reduce positions on those who have dropped in price. Since energy already accounts for 9% of the S&P and nearly all energy stocks have risen strongly over the last year it stands to reason that funds have to increase positions in energy stocks. This would make me question the validity of Friday's energy bounce in the face of falling oil but I will take the profits it produced.

For next week the markets are at a crossroads. We have rebounded to strong resistance at 10700, 2180, 1245 and we could not make it over those levels after several tries in July. I would be very surprised if we made it this time but then the strength of the Labor Day rally has already surprised me. With the S&P over 1225 we are in long territory but only with tight stops. A breakout here could develop some strong momentum very fast and quite a few bears will end up even more surprised then me. The anticipation of a September decline has many hedge funds in short positions and a sudden breakout would have them scrambling to cover.

SPX Chart - 5 min

If you look at an intraday chart of the SPX the high was set about 1:45 and we closed at the low of the afternoon. The Nasdaq high was in at 12:30 and it also weakened into the close. It looked to me like the beginning of a resistance fade on both indexes. However, given the lack of any material selling on a Friday afternoon after a strong rally I have to discount that possibility. That leaves me with only a slightly negative bias on a technical basis and bullish bias on an emotional basis. I would love to see a breakout and a rally for the rest of the year but there is no real justification for that desire. Late commentary suggests the Fed will continue raising rates and oil prices should stabilize either at the current level or higher. Both will continue to drag on the economy and eventually the market. Therefore, I plan on taking any profits we get on the long side but expect a failure at 1245 until the market proves me wrong. I did take another insurance short at the close on the Russell futures. If oil stocks move higher on Monday I will close the short and celebrate. If the reverse occurs I am protected against any drop. I am looking forward to my commentary on Tuesday night since odds are good it will be after strong directional move. Until then, remember to enter passively and exit aggressively and definitely don't get married to your positions or your bias.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

New Long Plays

Encore Capital Grp - ECPG - cls: 18.45 chg: +0.95 stop: 17.49

Company Description:
Encore Capital Group, Inc. is a systems-driven purchaser and manager of charged-off consumer receivables portfolios. (source: company press release or website)

Why We Like It:
Consumer debt is a huge business in this country and ECPG is one of the biggest names pursuing debt collections. The stock has been lost in a trading range for the last three months but that looks like it's about to change. This past Friday ECPG got an upgrade and that sent shares soaring through resistance at the $18.00 level and even higher past technical resistance at its simple 200-dma. We like the breakout but want to see some confirmation. Our strategy is to use a trigger at $18.76 to confirm the move. Currently the Point & Figure chart points to a $30.00 target. If we're triggered we'll target a move into the $21.00-21.50 range before its October earnings report.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/05 (unconfirmed)
Average Daily Volume: 112 thousand


Forest Labs - FRX - close: 44.80 chg: +1.07 stop: 41.99

Company Description:
Forest Laboratories' growing line of products includes: Lexapro (escitalopram oxalate), an SSRI antidepressant indicated for the initial and maintenance treatment of major depressive disorder and for generalized anxiety disorder in adults; Namenda(memantine HCl), an N-methyl-D-aspartate (NMDA)-receptor antagonist indicated for the treatment of moderate to severe Alzheimer's disease; Benicar*(olmesartan medoxomil), an angiotensin receptor blocker indicated for the treatment of hypertension; Benicar HCT(olmesartan medoxomil hydrochlorothiazide), an angiotensin receptor blocker and diuretic combination product indicated for the second-line treatment of hypertension; Campral*(acamprosate calcium), a glutamate receptor modulator, indicated for the maintenance of abstinence from alcohol in patients with alcohol dependence who are abstinent at treatment initiation in combination with psychosocial support; and Combunox(TM)(Oxycodone HCl and Ibuprofen), an opioid and NSAID combination indicated for the short-term management of acute, moderate to severe pain. (source: company press release or website)

Why We Like It:
The biotech sector has been hot lately with the BTK index hitting new multi-year highs. Helping contribute to the overall move higher in the sector has been FRX, which has been steadily marching higher from its April lows. Yet recently FRX has been stuck under resistance at the $45.00 level these past two weeks. We suspect that the stock is poised to breakout over resistance and hit new eight-month highs of its own. There is always an extra risk when trading biotech stocks. The company could announce at any time that one of its drugs in development did or did not hit certain testing benchmarks and the stock could gap either direction. Traders need to be aware that there are extra risks involved. There does appear to be some good news lately. It looks like FRX and IVX may finally come to a resolution on their Lexapro lawsuit and settle. We are going to suggest that readers use a trigger to open bullish positions. Our trigger will be $45.11. Our target will be the $49.00-50.00 range. Our time frame is five weeks.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/17/05 (unconfirmed)
Average Daily Volume: 1.7 million


Idex Corp - IEX - close: 44.43 change: +1.08 stop: 41.99

Company Description:
IDEX Corporation is the world leader in fluid-handling technologies for positive displacement pumps and metering products, dispensing equipment for color formulation, and other highly engineered products including fire suppression equipment, rescue tools and engineered band clamping systems. Its products are sold in niche markets to a wide range of industries throughout the world. (source: company press release or website)

Why We Like It:
Forbes recently ranked IEX as one of the top one hundred mid-cap stocks in America. That kind of press certainly doesn't hurt if you're bullish. We think the stock is technically poised to move higher. Shares broke through major resistance at the $42 level back in July and have been consolidating sideways in a $2.00 range ever since. Now that IEX has rested shares are breaking out to new highs again. Friday saw IEX push past the $44.00 level on above average volume, which also helped produce a new MACD buy signal. We're going to suggest new positions here above the $44 mark and target a move into the $47.50-48.00 range.

Picked on September 11 at $44.43
Change since picked: + 0.00
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 232 thousand

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Dow Chemical - DOW - close: 44.88 change: +0.21 stop: 42.79

DOW is a technical buy-the-bounce from the bottom of its trading range play. Yet it's also a rebound play in the chemicals, plastics, rubber sector. The industry has been suffering as higher oil costs raise their expenses to produce. Shares of DOW fell back toward the bottom of its four-month trading range before bouncing last week as crude oil price decline. Technicals have turned bullish and this continues to look like a decent entry point for bullish positions. However, there is still a chance that DOW will retest the $43.50-44.00 range before moving higher so more patient traders can sit and watch for a better entry point.

Picked on September 07 at $44.60
Change since picked: + 0.28
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume: 4.1 million


Ryerson Tull - RT - close: 21.42 change: +0.05 stop: 19.49

Shares of fabricated metal producer RT continue to inch higher. Expectations that the company will benefit from the Katrina rebuilding process are pushing the stock higher. Right now RT looks short-term overbought and due for a dip. Readers looking for a new entry point might want to wait for a test of its simple 10-dma near 20.65 and buy a bounce there. The bullish Point & Figure chart points to a $26 target. Our target is the $23.50-24.00 range.

Picked on August 31 at $20.54
Change since picked: + 0.88
Earnings Date 07/28/05 (confirmed)
Average Daily Volume: 486 thousand


Radian Group - RDN - close: 51.67 chg: +0.51 stop: 49.99

RDN has continued to bounce and the technical picture is improving. After the bell on Friday Fitch Ratings said that the financial guaranty companies like RDN would probably not be hurt by hurricane Katrina. This news should help give the stock a boost on Monday. The P&F chart is very bullish with a $77 target. Our early October target is the $54.00-54.25 range.

Picked on September 07 at $51.10
Change since picked: + 0.57
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume: 518 thousand

Short Play Updates

Anheuser Busch - BUD - cls: 45.40 chg: +0.46 stop: 46.25

Shares of BUD are trying to rally following the bullish breakout from its trading range last week. We told readers earlier to watch for BUD to make a run towards resistance at its 100-dma near the $46.00 level. It looks like that is what the stock is trying to do. More aggressive traders can use a failed rally under $46.00 as a new bearish entry point. We are not suggesting new plays at this time. The longer-term trend remains bearish and we're targeting the $40.00 region by its October earnings report.

Picked on July 28 at $44.77
Change since picked: + 0.63
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 2.3 million


Intl Game Tech. - IGT - cls: 26.88 chg: -0.45 stop: 28.01

IGT's Point & Figure chart currently points to a $13.00 target but we're obviously not seeing a lot of follow through to the downside. The stock produced a bearish head-and-shoulders pattern back in May through July. Since then IGT has been consolidating sideways between $26.50 and $28.00. We are not suggesting new plays at this time. More conservative traders may want to consider tightening their stops closer to the simple 50-dma.

Picked on July 21 at $27.21
Change since picked: - 0.33
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 2.3 million


Royal Caribbean - RCL - cls: 41.88 chg: -0.19 stop: 44.11

RCL continues to under perform the market and its bearish trend has seen a big surge in volume the last couple of weeks. The stock is nearing our target in the $41.25-41.00 range. Upon closer inspection we are going to adjust our target to the $41.50-41.00 range. More conservative traders may want to seriously consider exiting now to lock in profits. We are not suggesting new bearish plays at this time.

Picked on July 27 at $45.50
Change since picked: - 3.62
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 1.3 million


Wal-Mart - WMT - close: 45.89 change: +0.03 stop: 46.55

We do not have much new to report on for WMT. Shares dipped to $44.90 at the open but quickly rebounded. The stock tried to breakout over the $46.00 level but failed there too. The stock remains oversold while the larger trend remains bearish. We still expect a bounce toward the simple 21-dma before any attempt to trade lower. We're not suggesting new bearish entries at this time.

Picked on August 24 at $45.95
Change since picked: - 0.06
Earnings Date 08/16/05 (confirmed)
Average Daily Volume: 10.2 million


Yahoo! Inc. - YHOO - close: 33.46 change: +0.12 stop: 34.81

YHOO is not seeing a lot of follow through on Wednesday's failed rally. That makes us feel a bit more cautious here. Shares dipped to short-term support at the $33.00 level on Friday and bounced. Considering the bullish bias on the NASDAQ Composite right now we would not suggest new bearish plays. Instead we would wait for a new relative low under $32.65 before considering new shorts on YHOO.

Picked on August 30 at $33.18
Change since picked: + 0.28
Earnings Date 10/18/05 (unconfirmed)
Average Daily Volume: 17.1 million

Closed Long Plays


Closed Short Plays

Yellow Roadway - YELL - close: 42.81 chg: -3.20 stop: 50.01

Target achieved. As expected shares of YELL traded lower on Friday following its Thursday night earnings warning. The stock gapped down to open at $43.58 and then traded to $41.87 before bouncing. Our target was the $42.00-40.00 range. We're closing the play per our game plan.

Picked on September 04 at $46.88
Change since picked: - 4.07
Earnings Date 10/27/05 (unconfirmed)
Average Daily Volume: 1.2 million

Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives